September began in a strikingly similar manner to August, with significant stock sell-offs occurring during the first week of both months. Following this initial decline, markets rallied, ultimately closing the month on a stronger note. Below are the September returns for the popular benchmarks that investors track (Data provided by Y-Charts & Commonwealth Financial Network):

S&P 500 Index: +2.02%
Dow Jones Industrial Average: +1.85%
Nasdaq Composite Index: +2.68%
Russell 2000 Index: +0.56%
S&P Target Moderate Risk Index: +1.66%

A couple of weeks ago, the Federal Reserve reduced interest rates by 0.5%, leading to a rally in the stock market. Lower interest rates generally stimulate the economy, encouraging increased lending by businesses and individuals.

How do lower interest rates impact equities? Last month, we highlighted that in recent instances, stocks have faced challenges following rate cuts by the Fed. Expanding our analysis reveals that equities typically perform well unless the economy enters a recession within a year of the initial rate cut in a cycle. Below is a chart from Goldman Sachs illustrating this trend.

Additionally, equities tend to perform better when the Federal Reserve takes a gradual, measured approach to lowering interest rates. Recent instances where the Fed was forced to implement aggressive rate cuts in response to severe economic shocks (the COVID-19 pandemic and the Global Financial Crisis) resulted in significant market struggles. Ideally, a more gradual rate reduction over the next year would be preferable, as illustrated in the chart below.

We are just about a month away from the Presidential Election. As a reminder, October tends to be the worst month of the year for stocks during an election year. It would not surprise us to see more market weakness and volatility over the next few weeks.

However, post-election, markets often experience a relief rally heading into year-end, provided there is clarity on the election outcome. Furthermore, the fourth quarter is typically the strongest of the year in terms of market performance on average.

As always, don’t hesitate to reach out to our team with any questions you may have.